That Ulster Bank turned a loss of £381m in the first half of 2013 into a profit of £55m in the first half of 2014 is simply explained. The bank has already written-off and written-down so many of its non-performing loans that the scale of these so-called impairments is now quite modest.
Where the bank made impairments of over half a billion pounds in the first half of 2013, in the same period this year the amount fell to a ‘mere’ £57m. Still serious money of course – and without that, Ulster Bank’s financial position would look significantly better.
The underlying operating position of Ulster Bank is surprisingly stable. It made an operating profit, ignoring the impairments, of £122m in the first half of last year and £112m this year. The core business is doing reasonably well in financial terms.
Ulster Bank also avoided the heavy legal and compliance costs it incurred last year, which hit it for £25m in the first half of 2013. Those issues are not yet behind Ulster Bank though. The parent RBS admits that it has legacy conduct issues that will lead to additional future costs – and these are likely to affect Ulster Bank, too.
Outstanding issues include allegations of mis-selling some financial products, including complex interest rate swaps that were sold to small firms. Ulster Bank and the parent RBS are also likely to suffer fines imposed by the regulator as a result of the serious problems (and collapse on one occasion) of the IT systems.
Nor can there be confidence that further IT problems will be avoided, despite the substantial investment being made into upgrading the IT hardware and software and a programme of integrating the Ulster Bank’s systems into those of RBS and those of the RBS subsidiary, NatWest.
RBS and Ulster Bank are also dealing with a regulatory inspection of the RBS Global Restructuring Group (GRG) division, which had relationships with some Ulster Bank customers as well. GRG has been accused of forcing viable businesses into closure in order to asset strip them, an allegation that RBS and Ulster Bank strongly deny. The verdict of the regulator is eagerly awaited.
Ulster Bank executives will also be particularly concerned at its cost to income ratio – the lower the percentage, the more profitable, potentially, a bank is. At 69% cost to income, even allowing for impairments and other exceptional costs, the Ulster Bank figure will be a lot higher than the executives, or the parent RBS, want. It is also a lot higher than the ratio within the RBS branded banking businesses. This means that we can expect substantial further cost-cutting to be required at Ulster Bank.
Things are improving though for the taxpayer-rescued RBS and Ulster Bank businesses. Despite this, Ulster Bank branch closures will continue. Portfolios of old loans are being sold. Its operation in the Republic will probably also be sold. Reshaping Ulster Bank into a smaller, but profitable, bank will continue.